Dissident Directors and Proxy Access: Best Defense May Be the Same

I have a ‘no-action’ request by Apple on my desk. They are fighting my attempt to include consideration of a proxy access proposal at their next annual meeting. Like most no-action requests to the SEC, this one is full of dry uninspired attempts to raise procedural minutiae as a basis for exclusion. Also sitting on my desk is the latest issue of Directors&Boards with the following sentence in huge type on the cover: Should You Serve on an Activist’s Slate?”

That looks a lot more interesting. Apple can wait. Won’t it be nice, I think, when boards welcome proxy access, the new ideas and candidates that are likely to follow? Let’s see what they have to say at Directors&Boards.

Steven A. Seiden, of the executive search firm Seiden Krieger Associates, writes two articles with similar information from two perspectives. ‘Fortifying your board to defend against an activist’ asks boards to “think like an activist!” Critically examine who on the board is most vulnerable. Who can be seen as lacking independence (friends and family)? Has anyone served too long? Who lacks relevant experience of competence? Other factors include over-boarding, poor meeting attendance, having served on a board that adopted a poison pill, declared bankruptcy, etc.

Seiden then suggests proactive recruitment and evaluation using an outside professional consultant to assist in the process.

What kind of new director should replace those who would likely be targeted by an activist? The very type that the activist would nominate for his own slate… – directors who constructively question management’s strategy, have good instincts about what to ask, and probe until satisfied… He or she develops trusting relationships with present and new directors in order to facilitate needed change.

Seiden’s advice is to beat the activists to the punch. “Doing what an activist would do were he on your own board may be the best defense.”

Then Seiden’s writes to the potential board member. Should you serve on an activist’s slate? First determine if the activist is after a quick buck or do they have a real plan for enhancing shareholder value. He then walks the reader through what may come next:

Possible financial incentive to compensate you for time and reputation during nomination process. No, this shouldn’t compromise your independence. Once elected, you must vote in a way that benefits all stockholders.

Activist may ask you to go on the road and help make the case.

There are likely to be very sensitive questions, including a background investigation, to avoid possible criticism.

Publicity? Yes, but it shouldn’t be damaging, unless negatives are found.

Will you ever be invited to served in non-contested elections? Yes. “Such nominees are admired by other thoughtful directors as ‘shareholder patriots’ – advocating good governance and shareholder value.”

Seiden’s observations are reinforced by the next article in Directors&Boards, Bringing ‘another view of life’ into the boardroom. In a discussion by four who have been there, the only case mentioned where a dissident director was not constructive was Ross Perot’s role at General Motors. Generally, those elected from the shareholder perspective change the dynamic in the boardroom for the good and for the long term. Unlike change of control situations, where shareowners are desperate enough to give anyone else a try, dissidents are seen as a sort of ‘safety valve.’

There’s my cue. Within a few years, many boards will see proxy access provisions as a safety valve. In most cases, even if shareowners nominate a candidate or two, the competition with board nominees should be minimal… if the board has done its job and has chosen the best candidates. Challengers may introduce a new idea or two that can easily be evaluated by shareowners and the board and superior ideas can be implemented without much of a contest. Any expense will be minimal compared to the positive of more ideas being generated.

Where dissidents present a real challenge, the substance of their better ideas or qualifications will soon be apparent. Like dissidents nominated by hedge funds, winners of proxy access contests will, on balance, be mature, honest individuals with a strong and convincing point of view. Shareowners of Apple have nothing to fear but fear itself.

12-15% of Apple shares were voted against the re-election of three directors in 2013. Two of the directors winning substantial support were, by my way of thinking, potentially overboarded, since they sat on 3-4 boards each. Can they really devote the time needed to be conscientious directors at Apple if they are spread so thin? Four members have been on the board for more than 10 years. Can they really be considered independent? The company has also been flagged for Anti-Competitive Behavior, Child Labor, and Consumer Privacy Concerns. Others are concerned with the pace of innovation and/or the money pile. Don’t Apple shareowners deserve a safety valve, where candidates and ideas compete? Isn’t the competition of ideas and talent central to innovative companies? “Doing what an activist would do were he on your own board may be the best defense…” in both situations.

OK, I’m now motivated to get back to that tedious no-action letter. I hope you’ll be motivated to vote for proxy access when the opportunity arises.